What is an LLC?
A Limited Liability Company (LLC) is a business structure that combines features of corporations and partnerships. It is a relatively new and very popular business structure.
The chief characteristics of an LLC are:
- Like a corporation, an LLC is a business entity; it is a separate legal entity from its owners.
- Like a corporation, the personal liability of owners can be limited. This allows the owners to protect their personal assets from debts and liabilities of the business.
- Like sole proprietorships and general partnerships, the LLC can be taxed as a pass-through entity. The profits and losses of the LLC are reported on the personal income taxes of the owners and corporate taxes are paid at personal income tax rates.
- An LLC offers tax flexibility. It is the only structure that may elect with the IRS to be treated as a pass-through entity, as an S-Corporation, or as a C-Corporation. This flexibility helps your business save on taxes when it is just starting out and as it grows.
- LLCs are more flexible and easier to run than corporations. The LLC can usually dictate in its Operating Agreement how it will be run. It is a good idea, at minimum, to hold an annual meeting.
Quick Facts About LLCs
- LLC stands for Limited Liability Company.
- LLCs can have one or many owners which are called members.
- LLCs can be managed by its members or it can managed by managers which the members elect.
- Most LLCs start with pass-through taxation, then elect to be taxed as an S-Corp then a C-Corp as they grow.
- An LLC is formed under state government. It is formed by filing Articles of Organization or Articles of Formation. Forming the LLC in the state where you reside and do business is usually the most economical.
- An LLC is governed by its Operating Agreement. This document defines how the LLC will be run.
- An LLC may be required to file an annual report with the state government and pay an annual state fee or franchise tax.
Types of LLCs
Because LLCs are formed under state law, statutory code dictates the types of LLCs that may be created, the protections they offer, and how they should be run. Some of the special types of LLCs are:
- Many states offer Professional Limited Liability Companies (PLLCs) intended for legal, healthcare, and other licensed professionals.
- A Series LLC is a single LLC with several series of assets. The goal in this structure is to have one governing LLC overseeing several compartmentalized assets such as real estate properties.
- Usually an LLC is a for-profit business, but some states also offer non-profit LLCs.
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